Taxes

Buffett Rule or Not, Most Rich People Already Pay

"The share of our national income flowing to the top 1 percent has climbed to levels we haven't seen since the 1920s" — Barack Obama

President Obama’s sales pitch for the so-called Buffett Rule is simple: It’s only fair that those who make more than $1 million a year should pay a higher tax rate than middle-class workers. Here’s what he tends not to mention: For the most part, they already do.

Latching onto Warren Buffett’s lament that the law allows him to pay a lower rate than his secretary, Obama is urging Congress to pass a bill that would require households with adjusted gross incomes exceeding $2 million a year to pay a minimum tax rate of 30 percent, beginning in 2013. Households with incomes from $1 million to $2 million would see their taxes increase on a sliding scale up to 30 percent.

Obama is making tax fairness a central campaign issue—no surprise, since it allows the president to continually remind voters that Mitt Romney, who opposes the Buffett Rule as a burden on business, is one of those rich guys who pays tax rates in the mid-teens despite making millions. “Right now, the share of our national income flowing to the top 1 percent has climbed to levels we haven’t seen since the 1920s,” Obama said on April 10 in a speech at Florida Atlantic University. “Those same people are also paying taxes at one of the lowest rates in 50 years.”

Yet Romney—and Buffett, for that matter—are the exception. According to government tax data, the median effective tax rate for the middle 20 percent of U.S. taxpayers is 13.3 percent, including income, payroll, and corporate taxes. The top 1 percent of taxpayers pay a median rate of 29.6 percent, according to the 2012 Economic Report of the President. Just one-tenth of these highest-income households have tax rates of 8.7 percent or less.

If the Buffett Rule—officially named the Paying a Fair Share Act of 2012—became law, the number of people required to pay substantially more in taxes would be relatively small. Of the 217,000 households that would be affected by the rule, 4,000 will have incomes exceeding $1 million and tax rates below 15 percent, according to estimates for 2015 by the Tax Policy Center, a nonpartisan research group. The average rate, including payroll tax, for the middle 20 percent of taxpayers will be 15.9 percent, the center projects.

Although investors including Buffett and Romney—who are now taxed no more than 15 percent on capital gains and dividends—would be “clobbered” by the Buffett Rule, says Tax Policy Center senior fellow Roberton Williams, the tax rate of top executives, movie stars, and pro athletes wouldn’t change as much because their pay is already taxed as ordinary income. High-income households with a mix of ordinary and capital income currently have rates from 15 percent to 30 percent. Their taxes would rise, though they already pay more than middle-class households.

Democrats say the law has another benefit: It would increase U.S. tax revenue by $47 billion over the next decade, according to the Joint Committee on Taxation, the nonpartisan scorekeeper for Congress. Of course, that assumes the bill can get through Congress—which it almost certainly can’t. A procedural vote is set for April 16 in the Senate, where Democrats likely won’t overcome Republican opposition. In the GOP-led House, it will never see daylight. Representative Paul Ryan (R-Wis.), chairman of the House Budget Committee, mocked the Buffett Rule as “budget pixie dust” that would pay for only 6 percent of Obama’s proposed deficit spending. Not that he’s arguing for a larger tax hike. Ryan and other Republicans want to close the country’s future fiscal gap with spending cuts alone.

The president may be just as happy to have an issue to campaign on as a law to sign. “It may be an uphill battle,” White House Press Secretary Jay Carney said this week. “But it’s not an impossible battle.” Either way, the bill named after a billionaire is helping Obama make himself out to be a champion of the little guy.